Despite a 4x surge, this brokerage trades at a P/E of 16. Is it a value buy or a trap?

The brokerage boom is in full swing, and few can claim to have benefitted more than Motilal Oswal Financial Services. Rising retail participation in markets has led to a 3x jump in demat accounts in three years, propelling the brokerage's AUM above the coveted Rs 1 lakh crore mark (as of August 2024). Moreover, in FY24, the brokerage's earnings jumped a massive 2.6x YoY. D-Street has taken notice as well, and its share price has skyrocketed 3.6x in the past 12 months. In addition, a Momentum Score of 7 from our proprietary Value Research Stock Ratings underscores that investor interest is climbing.

However, despite its meteoric rise, the stock trades at just 16 times its 12-month earnings, leaving many to wonder if the stock is a strong value buy or a value trap. Let's find out.

Fold or hold?

To determine whether Motilal Oswal is undervalued, we compared its valuations with those of its industry peers. The brokerage generates 52 per cent of its operating profit from its Capital Markets vertical and 40 per cent from its Asset & Wealth Management business. Comparable capital markets players—such as Angel One, ICICI Securities, and IIFL Securities—are trading at P/E multiples between 14 and 16, while asset and wealth management firms like HDFC AMC, Nippon AMC, and 360 ONE command much higher P/E ratios of 40 to 45.

Based on these comparisons, Motilal Oswal does seem attractively valued. However, a closer look at its financials reveals that its P/E is only optically low. Around 37 per cent of its FY24 profit after tax came from Mark-to-Market (MTM) gains on treasury investments, as the brokerage invests a portion of its retained earnings directly into the stock market. This means that much of its recent earnings growth is a product of the bull market, not purely underlying business growth. Excluding these MTM gains, the stock's P/E stands closer to 30, a figure that appears more in line with industry averages.

Final verdict

The initial question was whether Motilal Oswal is a value buy or a value trap. The truth lies somewhere in between: the stock is neither an undiscovered bargain nor an overpriced bubble. We believe it is fairly valued at current levels. While the sharp gains in profits were driven by market forces, it would be wrong to interpret this as a sign of weakness in the company's core operations. Notably, its operating profit has compounded an impressive 31 per cent starting FY21. Also, the financialisation of savings trend is playing out well in India, providing a promising long-term outlook for the brokerage.

That being said, note that this is not a stock recommendation either. Before investing, you must dig deeper and conduct a thorough fundamental analysis of the business.

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